Q

What is a life insurance policy lapse?

A

When you stop paying premiums on your life insurance, your policy lapses and you lose your life insurance coverage.

When you take out a life insurance policy, you pay a monthly or annual premium to keep the policy active. If you stop paying those premiums your policy will lapse , meaning you lose your life insurance coverage and your beneficiaries won’t receive any life insurance money.

Fortunately, a life insurance policy lapse won’t happen immediately after one missed payment. All life insurance companies have a grace period , usually around 30 days, which allows your policy to stay in force temporarily and gives you a buffer if you need to make a late payment. During the COVID-19 outbreak, some insurers are extending their grace periods to 60 or 90 days. You’ll need to resume payments before the end of the grace period to avoid terminating your coverage.

Key Takeaways

  • Your life insurance coverage will lapse if you stop paying your premiums

  • Insurers offer a 30- to 31-day grace period before your policy lapses

  • It’s possible to reinstate your policy, but you may be subject to additional fees and higher premiums

  • During the COVID-19 pandemic, life insurance companies have extended grace periods to 60 or 90 days

What does it mean when a life insurance policy lapses?

When your life insurance policy lapses, it is no longer active. Without active life insurance coverage, your beneficiaries lose out on that financial protection if you die.

What causes a life insurance policy lapse?

It’s easy to miss a premium payment: maybe your address or banking information changed and you forgot to let your insurance company know. Or maybe your life insurance policy doesn’t fit into your budget anymore and you’ve decided to let it lapse. 

With any type of life insurance, your insurer is required by law to inform you when your policy is in danger of lapsing, and then again when it has officially lapsed. If you don’t make a payment before your policy’s grace period ends, you’ll lose coverage.

Term life insurance policy lapses

If you’re the owner of a term life insurance policy and you haven’t paid your premium by the end of your insurer’s grace period, you lose your life insurance protection. You won’t receive a refund of any premiums you paid previously.

Cash value life insurance policy lapses

Most cash value life insurance policies, such as whole life insurance, include a feature called an automatic premium loan . This allows your insurer to use your policy’s cash value to pay your premium if you miss a payment and the grace period ends.

However, if there isn’t enough cash value built up to cover your premiums—or if it’s depleted by continued non-payment—your policy will lapse.

How does the life insurance grace period work?

Every state’s department of insurance requires life insurance companies to provide a grace period for late payments. That grace period is usually 30 or 31 days (but may vary based on your provider and where you live) and begins on the due date of your missed payment.

During the grace period you’re still fully covered by your policy, so if you die your beneficiaries will receive the death benefit payout. But if you want to keep your coverage you need to pay your missed premium before the grace period ends. Depending on your insurer’s guidelines, you may also owe a late fee.

The grace period during COVID-19

During the current coronavirus outbreak life insurance companies are offering an extended grace period of 60-90 days for people experiencing financial hardship or unemployment

While some insurers have automatically extended their grace periods, others require a phone call or proof of financial difficulty. If you need extra time to make a payment, contact your life insurance company to explain your situation and find out their guidelines.

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Can you reinstate a lapsed life insurance policy?

You may have the option to reinstate your life insurance policy after a lapse. Start by contacting your insurer. The process for reinstatement varies for each company. 

Reinstating your policy is not as simple as making a phone call. You’ll also need to:

Typically, life insurance companies allow you to reinstate your coverage within two years of a policy lapse. The sooner you contact your insurer, the higher the likelihood that you’ll be able to reinstate your life insurance policy.

“Each carrier tends to have different guidelines for reinstating policies, and reinstatement is often a case-by-case basis depending on the situation,” says Patrick Hanzel, Advanced Planning Specialist and Certified Financial Planner at Policygenius. “Applying for reinstatement of a policy might involve signing a document stating that your health has not changed. Also, you will need to pay backdated premiums to the date that the policy lapsed.”

Depending on your insurer, you may also need to go through underwriting again. Your provider will evaluate how long ago your policy lapsed and whether you had any red flags in your medical history when you first applied for life insurance.

Some companies won’t require new underwriting if the policy has been inactive for less than 6 months; others may require only a limited underwriting process.

Is it cheaper to reinstate your policy or buy new life insurance?

It will likely take less time to reinstate your coverage than to buy a brand new one, but the cost of reinstating your policy compared to buying a new one will depend on:

  • When your policy lapsed

  • Your age

  • Whether your health status has changed

Purchasing a new policy may be more expensive because life insurance premiums increase with age and underwriting will catch any medical conditions you’ve developed since buying your last policy. However, you may have to pay back any premiums you missed, plus fees, to reinstate your lapsed coverage. 

If your policy lapsed recently, you may be able to save money by avoiding underwriting for your increased age and health changes. But if your lapse is less recent, it may be more affordable to buy a new policy and avoid reinstating a policy that would come with higher premiums and penalties for your missed payments.

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How to avoid a life insurance policy lapse

There are a few simple steps you can take to avoid missing a premium payment and jeopardizing your life insurance coverage:

  • Enroll in automated payments: Most providers allow you to set up automatic bank drafts for premiums so you don’t have to track payments on a monthly basis.

  • Switch to an annual payment schedule: If it fits your budget, paying premiums annually gives you fewer payments to stay on top of and may come with a discount.

  • Add a waiver of premium rider to your policy: Many providers offer a waiver of premium rider (also called a disability income rider) that exempts you from paying premiums if you become disabled.

  • Lower your coverage amount: If affordability is a concern, your insurer may allow you to decrease your death benefit amount or term length, which will lower your premiums.

  • Consider single premium life insurance: Single premium insurance is a cash value policy that requires only one payment for a lifetime of coverage, but the upfront cost is often $5,000-10,000 or more.

Life insurance policies financially protect your loved ones if you pass away. You can ensure that protection by doing your part to prevent a policy lapse and knowing what your options are if you lose your coverage due to nonpayment. 

Life insurance policy lapse FAQ:

What happens if you let your life insurance payments lapse?

If your life insurance policy lapses, then you no longer have coverage and your beneficiaries won’t get a payout from the life insurance company when you die.

Can you get money back from a lapsed life insurance policy?

If you stop paying your life insurance premiums and your policy lapses, you are not refunded any of the money you paid in premiums.

Can a lapsed life insurance policy be reinstated?

You may be able to reinstate a lapsed policy within a timeframe set by your insurer. This may require additional underwriting and payment of all missed premiums.

How long do you have to reinstate a lapsed life insurance policy?

You can generally reinstate your life insurance policy within two years of it lapsing, but the period varies for each life insurance company.